Founder: Turnaround Talk
When the subject of liquidations is brought up, the Comair saga that eventually led to the company’s BRPs filing for provisional liquidation will be talked about for many years to come. There will be many questions that will need to be answered and many more questions that we may never get an answer to.
The main question that we have to ask is whether the Comair liquidation is an indicator of a tough operating environment that will lead to many more liquidations. South Africa is showing tentative green shoots of a recovery from the Covid Pandemic and it is vital that we preserve value wherever we can.
Despite concerns about a volatile environment, the yearly report by Statistics South Africa (Stats SA) which focuses on liquidations points out that the Comair decision to move towards liquidation is not indicative of the market.
Liquidations: results for May 2022
The report points out that the total number of liquidations decreased by 1,6% in May 2022 compared with May 2021. Voluntary liquidations decreased by 8 cases, while compulsory liquidations increased by 5 cases.
The total number of liquidations decreased by 8,9% in the first five months of 2022 compared with the first five months of 2021.
This tends to suggest that most companies that are financially distressed are able to avoid liquidation.
Liquidation Squid Games: who got it bad
While it is encouraging to note that the total number of liquidations is decreasing – for the moment – it is important to note that there are industries that are facing significant volatility.
The financing, insurance, real estate, business services faced the most volatility where liquidation was common.
If we look at the period from January 2022 to May 2022, there were 233 liquidations within this sector. May alone saw 53 liquidations. There were only 34 liquidations in April meaning that May was a heavy month for the industry with an increase of 19 liquidations in a single month. However, it is a slight decrease from the liquidations experienced in May 2021 where there were 59 liquidations.
The trade, catering and accommodation industries also faced significant volatility where most companies could not avoid liquidation.
If we look at the period from January 2022 to May 2022, there were 168 liquidations within this sector. May alone saw 40 liquidations. There were only 32 liquidations in April meaning that May was a heavy month for the industry with an increase of 8 liquidations in a single month. However, it is a slight decrease from the liquidations experienced in May 2021 where there were 42 liquidations.
Finally, the construction industry also faced volatility.
If we look at the period from January 2022 to May 2022, there were 51 liquidations within this sector. May alone saw 12 liquidations. There were 13 liquidations in April meaning that May was an improvement for the industry with decrease of one liquidation. The volatility in the industry is severe as there was an increase of five liquidations form the liquidations experienced in May 2021 where there were seven liquidations.
Table By: Stats SA
What does this mean?
The liquidations in these key industries are reflective of a growing trend that is prevalent in society.
With the levels of inflation that we are seeing, which has a direct impact on the cost of living, discretionary spending is under severe pressure. The famous line of Finance Ministers in the past that the public must tighten their belts needs to change because many families have lost so much weight out of their budget that they need smaller belts as opposed to new holes on their existing ones. When discretionary spending is under pressure, insurance and other services within the financial services sector is seen as a grudge purchase. While living to a budget is important now more than ever, the role of Certified Financial Planners do become pressurised when their clients are living hand-to-mouth. Liquidation may be the only option for companies who face a significant decrease in their cashflow.
We are also seeing significant volatility in the real estate sector. The average time to sell a home in 2020 was 90 days. This shot up to between 110 and 115 days in 2021. There are fears that this may increase to between 120 days and 130 days (just shy of six months) by the end of the year. We are also seeing significant volatility in the rental market where there are significant reductions in rental in the retail space.
When it comes to trade, catering and accommodation, we are seeing the same trends being reflected. When discretionary spending is under pressure, travelling becomes a luxury. This is not being helped by the Ukraine war and fears of a US recession. Domestically, the Comair liquidation may make it more expensive for people to fly to popular holiday destinations, and with the petrol price what it is, many will be opting for stay-cations this year. Adaptability will be the key to this sectors survival.
There is currently no legal requirement to wear masks indoors. However, this does not mean that there will be a sudden boost in conferencing. Saripa’s conferences will be hybrid events this year reflecting the desire of some people to attend these events form the safety of a bubble. It also remains to be seen if weddings will be the same size that they were pre-Covid which will also impact catering.
Liquidation is still a last resort
Liquidation is always a last resort when there is no reasonable prospect of saving a company.
As we saw with Comair, there are plenty of considerations that need to be taken into account when agreeing to fund a business rescue/business turnaround. Will the complexity of these considerations increase in the future? Time will tell.
